Special Report: Augmented hype? Mobile's next big thing

AMSTERDAM (Reuters) - Maarten Lens-Fitzgerald signs off his messages with a little joke: "This email might have been written while cycling." It could be an apology for his spelling, an allusion to the fact he's Dutch or even a hint at his oddball imagination. Or perhaps, given Lens-Fitzgerald is the head of a company that wants to fuse the virtual and physical worlds, it could be taken literally.

The round-faced 39-year old is the founder of one of the hottest prospects in the mobile space, Layar. The Dutch company wants nothing less than to become the platform of choice for the burgeoning new medium of Augmented Reality (AR). Running on smartphones and tablet computers, AR overlays digital information - text, graphics, games -- on images of the world around us.

Some executives in the mobile industry think AR will be huge. While revenues from AR alone amount to no more than a few tens of millions of dollars, that number is set to double annually to reach $350 million in 2014, according to New York-based ABI Research. The impact across the broader mobile and computer industry could be much bigger, convincing consumers to use their mobile devices even more than they already do.

Samsung Electronics used Layar as the leading feature of many advertisements for its hit smartphone model Galaxy S, last year's top iPhone rival, which generated revenues of $5 billion.

In August 2009, when 'Wired' magazine claimed "If you're not seeing data, you're not seeing," AR was still more whimsy than real world. But in the past year, developers around the world have started launching applications that use AR and aim to make the virtual world an inherent part of our daily lives. Tech heavyweights including Adobe, Apple, Google, Intel, Nokia, Qualcomm and Samsung have noticed and are all developing AR strategies.

(Readers with an iPhone or Google Android smartphone or tablet can check out key AR companies, including firms interviewed for this story, by searching on Layar's browser for "AR by Reuters, '11.")

Informed by such sci-fi authors as William Gibson and Vernor Vinge, and Mitsuo Iso's anime TV series "Denno Coil" (Electronic Brain), Lens-Fitzgerald and a few fellow developers are at the forefront of this potential revolution. Intel's venture arm Intel Capital invested 10 million euros ($ 13.4 million ) in Layar in late 2010. "Other guys are about technology, while Layar is about usage, and that's the unique thing," says Marcos Battisti, regional director at Intel Capital. Then comes a big -- and familiar -- 'but'. "The numbers are very big, it is sticky," says Battisti. "The key is, how do they monetize it?"

Sitting around munching a sandwiches-and-milk lunch with colleagues in the company's open-plan office in Amsterdam's former docklands, Lens-Fitzgerald almost sounds like a Silicon Valley script from the late 1990s. Wearing a violet sweater hauled over an untucked shirt which lends him the air of a geeky scruff, he argues that the question of profit, while important, misses the point: "The promise is so big, we do not want to limit ourselves with a business plan."

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Technology analysts Forrester also see potential for AR to become a force that fundamentally changes the way people behave. "In the years to come, it will be a disruptive technology that changes the way consumers interact with their environments," says Forrester's analyst Thomas Husson.

One thing is clear: if the hype around AR feels at times like Dotcom Boom 2, then the sequel will be in 3-D, if not in 4-D. Many of the apps so far depend on where you are, and what you see around you and are triggered by your movement within a space. "Location," tweeted Nokia sales chief Niklas Savander last October, "is the next big thing."

FROM HELMETS TO LAYERS

As a technology, AR is not new. Originally associated with the backpacks and helmets that nerds used to carry the equipment for techno games, the fusion of visible reality with computer-generated digital information has been under development for more than a decade. In its simplest everyday form today, you can see it in action in sports TV: in the line superimposed over footage of a race to show where it ends, or the pitch-side advertising banners that can change depending what market you're watching a game in.

What takes AR onto less familiar ground is the surging popularity of smartphones and tablet PCs. Smartphone sales grew more than 50 percent last year to 289 million handsets, and tablet sales grew from almost nothing to 55 million, according to research firm Gartner.

That growth, combined with the availability of good-quality location data via Global Positioning System (GPS) and faster data speeds, has opened up a plethora of new possibilities, which so far mostly revolve around ways of delivering information to handhelds as their users move through, look at and listen to the physical world.

"AR is a continuation of the map. It's at the core of the user interface," says Michael Halbherr, Nokia's chief of services products. "I think it's big."

For a basic example, take the story of Layar's first customer: an Amsterdam real estate broker which liked the idea of offering clients a real-life look at the properties on its books. Using Layar's technology, it built a smartphone app -- what the Layar team call a 'layer' -- to let users access details about apartments for sale in a building just by pointing their smartphones at it. That was in May 2009. "Then all hell broke loose," says Lens-Fitzgerald.

Today, Layar has more than 1 million active monthly users, and its technology -- which offers a platform or browser on which people can build their own apps rather than the end-products themselves -- has been installed on more than 10 million phones and tablets. So far, its system works only on iPhones, or those that run Google's Android or Samsung's bada. A version for Nokia's Symbian, the largest smartphone operating system, is due out soon. Of the 1,500 layers created so far, popular apps include a virtual Berlin Wall, which tourists can use to see what a neighborhood looked like when the Wall was still standing; the Beatles tour, which has a nifty 3-D model of the Fab Four crossing Abbey road; and the AR marketplace, eLay.

GEOGRAPHY GETS COOL

Others see the potential of AR and location-sensitive computing, and are working on projects that could help -- or hurt -- Layar's ambitions. A multitude of AR apps are currently under development for different handheld platforms. As was the case with the Web, AR backers aim to make the infrastructure platform-agnostic. That means that even if AR might be used as a weapon in the battle for market share among handhelds in the short term, the longer war will be less about hardware than the quality of content.

Global handset leader Nokia wants to make sure it's in the AR game. The Finnish firm has spent billions on a bet that adding real information to the services on phone and handheld screens will be a major reason people buy their phones and use their services in the future. In 2008, Nokia spent $8.1 billion on Navteq, the world's largest digital mapping firm, which makes most of its revenues from selling its database for use in navigational aids. As AR grows, this sort of rich data will likely grow in value.

That's why Mira Maki-Mantila can often be found patrolling the streets of Finland. Maki-Mantila is one of Navteq's 1,000 geographers and spends a lot of her days sitting beside a driver in a van topped with a futuristic video camera. As she made her way around the snowy streets of Helsinki late last year, she recorded the street layout in a monotone voice - crossroad, crossroad, restricted turn, crossroad. Occasionally she took out a touch screen PDA and scribbled some notes on it. "It's a dream job for a geographer," she says.

Back in her office, Maki-Mantila continues mapping the world -- transcribing the data from her journey, updating old maps, building new ones, and marrying the information with a videostream of the road. Navteq's digital maps are used by the auto and mobile industries offering navigation services. Its main rival is the mapping arm of Amsterdam-based TomTom, which also provides maps to Google.

But it's not only map-based apps. Location-focused social networks like New York-based Foursquare are also catching on. Foursquare allows consumers to use their mobile phones to keep track of their friends' whereabouts and earn rewards for visiting bricks-and-mortar businesses.

Poynt, a company in the Canadian city of Calgary, had just 10 users when it started out in June 2008. Now its offering -- the ability to hold up your phone and get information about the businesses, movies, restaurants and even people around you -- has 4.5 million users in North America and Europe. "We've got this tiger by the tail and are just trying to hang on," says its CEO Andrew Osis.

FACEBOOK GETS UNCOOL

There's more. Israeli entrepreneur Noam Bardin may not have Navteq's geographer-army but he does understand the power of online social networks. His company Waze asks its 2 million users to send back data and information as they drive round the world. "The number-one feature people ask for is the chance to see other users," says Bardin. "When we allowed people to see other users, people just loved it."

Games, too, have started to make an impact. On Layar, Pacman-style ARcade lets players "eat" virtual goods around them, while on iPhone, Shadow Cities, a role-playing game in which players cast spells on each other in a territorial fight over their real-life neighborhoods, hit the top of download charts last year in Finland, and is now heading to the U.S. market. People are jumping on busses to go and battle for dominance of parts of a town, enthuses Ville Vesterinen, chief executive and co-founder of Grey Area Labs, the company behind Shadow Cities. "We call it drive-by spell-casting."

Outfits like Boston-based mobile social gaming startup SCVNGR (pronounced scavenger) are after a similarly interactive experience. The Google-backed group modestly says it wants to build a game-layer on top of the world. It aims to combine mobile gaming with real-world challenges that are relevant to education and work, adding to the basic check-in features of services like Foursquare. Doing things digitally, SCVNGR execs hope, will capture people's interest more than just relaying real-world experiences on Facebook and Twitter.

"We are not trying to build another social network plus location," says its founder, Seth Priebatsch, who is up there with Lens-Fitzgerald when it comes to hype-generation. "We think the decade of social networking is over. It's called Facebook."

MONETIZING THE SPACE

There's just one problem: so far, location services and AR are not making much money. "Nobody has figured out a killer application in location yet," says Rich Wong of venture firm Accel Partners. Andre Malm of Swedish wireless research firm Berg Insight notes that the players are pretty much fighting for a slice of the same pie -- companies' advertising budgets.

The mobile advertising market is worth a tiny sliver of total online ad spending: $6.9 billion or 1.6 percent of $444 billion, according to research firm Strategy Analytics. "What it comes down to is, is there enough advertising money to go around in mobile? There seems to be a clear upward trend, but even at high growth rate it would take many years to become substantial," Malm says.

People like Vesterinen, who are deeply into virtual reality games already, are certain the money can be made, and not just in advertising. For a start, he points to Activision's "World of Warcraft" which has more than 12 million subscribers, each paying $15 or more each month. Contrast that with the current price of a mobile phone-based game: most often a one-off fee of $0.99.

"We have seen it's really difficult to build a business based on $0.99 applications. Even when you sell in the tens of millions you cannot build a sustainable business out of it," Vesterinen says. Case in point: Rovio, the Finnish firm behind the game "Angry Birds". Though "Birds" is a top-seller at app stores, Rovio's 10 million euros in sales last year was roughly on a par with the sum "Warcraft" pulls in a day. With high-quality content and with enough sustained user-generated involvement, though, Vesterinen believes people will be prepared to pay more serious sums.

Few experts see a brave new media world anytime soon. "Augmented Reality is not realistic for the mass-market within three years," says Accel's Wong. Intel Capital's Battisti agrees. "Will it hit the high street in 2011? No, it will take time," he says.

HYPE MY ENVELOPE

Layar's Lens-Fitzgerald isn't worried. By getting in so early, his company is well-placed to cash in as interest in AR grows, however slowly. Already multinationals are coming. Swedish furniture chain IKEA built an app allowing customers to virtually transport an item of furniture from its catalog into their homes, and Danish toymaker Lego made one that allows customers to point a phone at a box and see what the finished product will look like.

Lens-Fitzgerald calls all this "brochureware". The money it brings in means that Layar, unlike some Web startups in the 1990s, already has a small revenue stream. That cash, plus injections of cash from Intel Capital and other investors, offer the company a financial cushion to give it time to refine its business case. The company is hiring: staff numbers are expected to double to closer to 100 over the year. "What we definitely don't know is what's going to happen in two years," he says.

That doesn't stop him from giving good hype. "We want to be the first giant originated from mobile," he says. "We want to be the biggest platform of Augmented Reality, the YouTube of Augmented Reality."

Comparing AR's emergence to that of radio and TV, Lens-Fitzgerald likes to talk about the way those formats only developed as people grew to appreciate each medium's real potential. "When TV emerged, the first programs were radio shows on TV, just people talking in front of a curtain. A long way away from ... 'American Idol'," he says. In the same way, apps that are being produced now are like early ventures in cinema. "We are at the stage of the silent movie. We see the potential ... but first have to get the current version to be successful."

Standing in the Layar office, you can see how he and his colleagues think like this. Outside the windows are two reminders of old media milestones: the logo of "de Volkskrant", a newspaper founded in 1919, and the offices of SBS Broadcasting, one of the companies that helped bring the "Big Brother" reality shows to living rooms around the world. AR, Lens-Fitzgerald says, is the next great leap. Addressing Google's Zeitgeist forum for Europe last May, he spelled out the vision: "Medium-specific content is being created -- content that does not exist on the web -- that cannot be put in a magazine or on TV, it only exists in AR, and it really is in its own there. We believe the future Amazon, the future eBay, is being born amongst the developers of Augmented Reality."

Hype is, of course, part of any digital media venture. Lens-Fitzgerald and the friends with whom he founded the company -- Raimo van der Klein and Claire Boonstra -- acknowledged that, when they drew their own back-of-the-envelope version of the 'Hype Cycle' devised by tech analysis firm Gartner. The Gartner analysis shows the typical trajectory of a new tech business, starting with the "Technology Trigger", and passing through the "Peak of Inflated Expectations" and the "Trough of Disillusionment" before reaching the "Plateau of Productivity". Prominent on Layar's sketch, which they've posted to Flickr, is a bold arrow that continues to rise beyond the "Plateau of Productivity" phase.

Lens-Fitzgerald built his first website -- for Royal Dutch/Shell -- in 1994, and on his blog gives equal prominence to the year he went online (1993) as to the year of his birth. His tweets (handle: Dutchcowboy), and blog -- including a day-by-day account of his 2008 treatment for a tumor "the size of two fists" between his lungs -- display a lively irreverence. His blog landing page shows him in a schoolboy-scarf sticking his tongue out at the world.

He has a lot to get done. His cancer diagnosis -- he now calls himself "ex-patient 2.0" -- came just a couple of weeks before he was due to form the startup that paved the way for Layar. He actually signed the papers that founded the company on his way into hospital for his first session of chemo.

Despite his e-mail sign off, he's not actually likely to write mails on his bike. "When you cycle in Amsterdam," he says, "you have to watch out for trams and taxis." Even for the man who wants to build our next virtual world, some things are just too real to ignore.